Is It Time to Tax the Internet?

How our communities can stop losing out on business and tax revenue.
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Photo by Talking Tree

In an ongoing recession, many analysts predicted lackluster spending during 2011's holiday shopping season. But you wouldn't know it online. Last year was a record-breaking one for Internet spending: the most money spent online in a single day ($1.25 billion on Cyber Monday), the most money spent online in a single week (nearly $6.3 billion during the week ending on Dec. 18), the most money spent online during any holiday shopping season, ever (more than $37 billion).

This represents a huge shift in the American economy—one that will have a major influence on our local economies and communities.

In 2011, a smaller percentage of consumer dollars went to sales tax than at any time since 1967.

Convenience and limitless inventory are part of the reason shoppers are flocking online, but that’s not all. In most places, Internet businesses are generally free from sales taxes, while brick-and-mortar stores must tack 4 to 9 percent on to each order. This not only hinders chain stores and big boxes, but also the many shops that enliven our neighborhoods while meeting our needs.

Any way you look at it, this is patently unfair—a government-sanctioned bribe to buy from Amazon instead of your local book dealer, from e-Bay rather than that cool vintage store around the corner.

In tough times like these, a lot of independent businesses are already balanced precariously on the edge of insolvency, and a few more cents added to every dollar in sales might push them right over.

Fifteen years ago, this naked favoritism toward Internet sales was viewed as a justifiable way to nurture a promising new economic sector, and to help encourage the overall growth of the worldwide web. Well, that’s ancient history now. Big web-based retailers need this kind of public largesse like Exxon needs a small business loan.

Big web-based retailers need this kind of public largesse like Exxon needs a small business loan.

No one likes to pay taxes, and it’s true that sales taxes hit poor people much harder than the wealthy. But it’s also important to remember that sales taxes bankroll a lot of state and local services we depend upon—from public transit to public education to police protection.

A recent analysis by USA Today found that, in 2011, a smaller percentage of consumer dollars went to sales tax than at any time since 1967. Less sales tax revenues mean less public assets and services that benefit us all. In short, the commons in our local communities lose out when e-retailers duck taxes.

And to make matters worse, empty storefronts foreshadow a plunge in property tax revenues, the mainstay of many local governments. Local and state budgets have already been clobbered by rising deficits coming out of the Great Recession, and further leaks in their tax bases will mean even more draconian cuts to critical public programs.

In Arizona, state legislators voted to send a bill to Amazon for sales tax on purchases made by state residents (Amazon says it has no plans to pay). A number of states—including California, New York, Rhode Island, Connecticut, North Carolina, Illinois, and Arkansas—have passed laws requiring sales tax if Internet retailers' affiliates are based within their borders. In Minnesota, where taxpayers must make up for $149 million in tax revenues lost to out-of-state e-retailers, the legislature is considering a bill to apply a modest tax to e-commerce—and winning support even from some fervent “no-new-tax” Republicans.

Taxes on Internet sales may be one way to raise more revenues for needed government services, in an era when Republican fanaticism rules out most other sensible proposals.

The Main Street Fairness Act, introduced in Congress by Sen. Richard Durbin (IL), Rep. John Conyers (MI) and Rep. Peter Welch (VT) would level playing field between stores in our community and Internet merchandisers. According to the New Rules Project, the law “would allow states, provided they have met certain conditions, to require large Internet and mail-order retailers to collect state and local taxes.”

The legislation states, “As a matter of economic policy and basic fairness, similar sales transactions should be treated equally.”

The National Conference of State Legislatures points out that states could eliminate $23.3 billion of their combined budget gaps if the online retailers collected sales taxes in 2012. 


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